For $168 billion, we should get a better tax return

By Caroline Baum, Bloomberg News

Updated:
04/12/2013 10:13:43 AM EDT

It started as 30 words. One hundred years later, it's almost 4 million.

The 16th Amendment to the Constitution, creating the federal income tax, and the millions of words in the tax code today provide data points marking the evolution of a simple concept into a convoluted reality.

The statistics on the burden imposed by the byzantine tax code get wide circulation every year at this time:

* Americans spend more than 6.1 billion hours and $168 billion complying with the tax code.

* Most Americans (60 percent) hire a professional or use tax- preparation software (30 percent).

* The tax code has had 4,680 changes since 2001, more than one a day.

Everyone complains about its complexity. The IRS's taxpayer advocate cites it as the No. 1 problem. Politicians seem to agree that the road to tax simplification goes through lower rates and a broader base. Yet all that consensus has yielded precious little progress.

Max Baucus and Dave Camp, chairmen of the Senate and House tax-writing committees, respectively, said in a Wall Street Journal op-ed on April 8 that comprehensive tax reform is "alive and doable." They will seek our input, using social media, in coming weeks.

The two lawmakers have already agreed on "fundamental principles." Tax reform should level the playing field for ordinary families by retaining the code's progressivity and closing special-interest loopholes. It should help U.S.

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companies compete globally by lowering the corporate-tax rate and ensuring that they comply. And it should encourage small-business formation and hiring.

Noble goals. Yet one day before the Baucus-Camp op-ed appeared, the New York Times ran a front-page exposé on lobbying. The Times analysis found that "at least 28 aides who have worked for Baucus, Democrat of Montana, since he became the committee chairman in 2001 have lobbied on tax issues during the Obama administration -- more than any other current member of Congress."

How, exactly, did we get from the introduction of the income tax on Feb. 3, 1913, to $1.1 trillion of annual tax expenditures, which are government spending by another name minus the transparency?

"The short answer is, there have always been preferences," says Joseph Thorndike, director of the tax history project at Tax Analysts, a publisher in Falls Church, Va. "From the start, there was a deduction for interest paid. It was intended to be a business deduction -- a cost of doing business -- but people with mortgages started to deduct interest."

The charitable deduction was introduced in 1917 "to make the world safe for philanthropy," he says. Then came the preferential treatment of dividends and capital gains; and so on. All these violate the principle of tax fairness -- the idea that people with the same income should pay the same tax rate.

The real impetus for tax breaks came in the 1950s. Congress realized the top marginal rate of 91 percent was a political liability, so lawmakers crafted exemptions to make the rates easier to swallow.

In March 2011, the Senate Finance Committee asked the same question I'm asking -- How did we get here? -- and scheduled a public hearing. The Joint Committee on Taxation provided the background. The report found that of the 270 tax expenditures that existed or were adopted from 1987 to 2007, 202 remained in place in 2007.

"In general, tax expenditures, once adopted, tend to stay in place," the Joint Committee on Taxation notes in its report.

No surprise there. The last attempt to streamline the tax code by lowering marginal rates and broadening the base was in 1986. Top marginal rates began to creep up soon after, and so did the number of tax loopholes, according to the report.

Efforts to repeal the 16th Amendment have come to naught. "The Flat Tax," first proposed in 1981 by the Hoover Institution's Robert Hall and Alvin Rabushka, is an appealingly simple solution with no real advocates except Steve Forbes. Equally compelling is the idea of replacing the income tax with a national retail-sales tax.

Yet here we are, talking once again of comprehensive tax reform that creates proper incentives to work and save, simplifies our lives, removes inefficiencies and boosts the economy. I don't want to be disappointed again.

Thorndike tells me I need to think about the issue differently. "Tax reform isn't a destination," he says. "It's a journey."

We got there in 1986, he explains. And we will have to fight this battle again, every year. It's the price we pay for democracy.

Caroline Baum, author of "Just What I Said," is a Bloomberg View columnist.

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